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5.1 Measuring Inequality

  1. Income Distribution and Poverty:

    • Economists distinguish between two main types of income distribution:

      • Size (Personal) Distribution: Focuses on individual or household income without considering how it was earned.

      • Functional (Factor Share) Distribution: Divides income among production factors like labor, capital, etc.

5.1.1 Size Distributions

  • Size Distribution of Income: Examines how income is distributed across individuals or households, without considering the source (employment, rent, inheritance, etc.).

  • Quintiles and Deciles: Population divided into fifths (quintiles) or tenths (deciles) to analyze how much of the total income each group receives.

    • Example: The top 20% (fifth quintile) may earn a disproportionate share of total income.

  • Kuznets Ratio: Measures income inequality by comparing the income of the top 20% and the bottom 40%. A higher ratio indicates more inequality.

5.1.2 Lorenz Curves

  • Lorenz Curve: Graphically represents income distribution. It compares the cumulative percentage of the population to the cumulative percentage of income.

    • Perfect Equality: Diagonal line on the Lorenz curve, where everyone receives an equal share of income.

    • Income Inequality: The more the Lorenz curve bends away from the diagonal, the greater the inequality.

  • Lorenz Criterion: One Lorenz curve lying above another indicates a more equal income distribution.

5.1.3 Gini Coefficient

  • Gini Coefficient: A measure of income inequality that ranges from 0 (perfect equality) to 1 (perfect inequality). It is derived from the Lorenz curve.

    • Common Values: Higher Gini coefficients (0.50-0.70) indicate higher inequality, while lower values (0.20-0.35) suggest greater equality.

5.1.4 The Ahluwalia-Chenery Welfare Index (ACWI)

  • ACWI: A method of measuring welfare by assigning more weight to income gains by the poor than to those by the rich.



5.2 Measuring Absolute Poverty

  1. Income Poverty:

    • Absolute Poverty: Defined as the number of people who cannot meet basic needs, often measured by living on less than $1.90 per day (PPP).

    • Headcount Index (H/N): The proportion of the population below the poverty line.

      • Poverty Line: A fixed real income level below which individuals are considered to live in "absolute human misery."

  2. Poverty Measures:

    • Total Poverty Gap (TPG): The total income needed to bring all individuals below the poverty line up to that line.

    • Foster-Greer-Thorbecke Index: A measure that accounts for the depth of poverty, not just the number of people below the poverty line.

    • P1 and P2: Measures that consider the distribution of income among the poor and the degree of inequality within this group.

  3. Other Concepts:

    • Coefficient of Variation (CV): Another measure of income inequality, often used alongside the Gini coefficient.

    • Person-Equivalent Headcounts: An improved headcount measure that reflects changes in the poverty gap.

Multidimensional Poverty Measurement

  1. Limitations of Income-Based Poverty Measurement:

    • Income alone cannot fully capture poverty, as emphasized by Amartya Sen's capability framework.

    • The dual cutoff method is used to identify multidimensional poverty, involving cutoff levels for different dimensions and a threshold for the number of dimensions a person must be deprived in.

  2. Multidimensional Poverty Indices:

    • The multidimensional M index is constructed similarly to the P index for income poverty.

    • The multidimensional headcount ratio (HM) indicates the fraction of the population considered multidimensionally poor.

    • The adjusted headcount ratio (M0) incorporates the average intensity of deprivation, maintaining a desirable property known as "dimensional monotonicity."

  3. Application and Indicators:

    • Proxy measures or indicators are used for selected dimensions in studies like the UNDP Multidimensional Poverty Index and the Women’s Empowerment in Agriculture Index.

Relationship Between Poverty, Inequality, and Social Welfare

  1. Impact of Inequality on Development:

    • Social welfare is positively correlated with income per capita and negatively correlated with both poverty and inequality.

    • Extreme inequality leads to economic inefficiency and limits access to credit for low-income individuals, hindering education and entrepreneurship.

  2. Social Stability and Political Power:

    • High inequality undermines social stability and empowers the wealthy, who may resist reforms that benefit the broader population.

    • Societies with extreme inequality may experience civil strife and increased crime rates.

  3. Perceptions of Fairness:

    • The philosopher John Rawls introduced the "veil of ignorance" thought experiment, suggesting people would prefer a more equal distribution of resources if unaware of their future identity.

    • The formula for social welfare incorporates income, inequality, and absolute poverty, highlighting the need to assess all three factors in development contexts.

Economic Growth and Inequality

  1. Stylized Typologies of Growth:

    • Three types of dualistic development are identified:

      • Modern-sector enlargement growth: Expands the modern sector while keeping wages constant, often leading to temporary inequality.

      • Modern-sector enrichment growth: Benefits a fixed number of modern sector workers, leading to increased inequality without poverty reduction.

      • Traditional-sector enrichment growth: Distributes growth benefits among traditional-sector workers, improving equity and reducing poverty.

  2. Kuznets’s Inverted-U Hypothesis:

    • Suggests that income distribution worsens initially during economic growth but improves later.

    • Empirical evidence shows variations, indicating that inequality can decrease even with rising incomes, depending on the development process.

  3. Data Insights:

    • Data from various countries indicate that higher per capita income does not necessarily correlate with lower inequality.

    • Differences in income distribution exist across countries, regardless of their economic status, highlighting the complexity of the relationship between income and inequality.

5.4 Absolute Poverty: Extent and Magnitude

  • Absolute Poverty: A condition where individuals live below a specific income threshold, unable to meet basic needs for survival (e.g., food, shelter).

  • Poverty Line: The income level set to determine who is considered poor. Key thresholds:

    • $1.90 per day: World Bank's current extreme poverty line.

    • $3.80 per day: A higher threshold reflecting more moderate poverty.

  • Headcount Ratio: The percentage of a population living below the poverty line. It fell to about 18% by 2010.

  • Millennium Development Goals (MDGs): Global goals aimed at reducing extreme poverty. The first MDG was to halve extreme poverty by 2015, which was achieved.

  • Chronic Poverty: A state where individuals remain poor over an extended period. Approximately one-third of the income poor are chronically poor.

5.4.1 The Multidimensional Poverty Index (MPI)

  • Multidimensional Poverty Index (MPI): A measure that captures poverty through three dimensions:

    • Health: Indicators related to mortality and nutrition.

    • Education: Indicators related to school enrollment and attainment.

    • Standard of Living: Indicators including access to clean water and electricity.

  • Negative Interaction Effects: When individuals experience multiple deprivations, their overall poverty experience is worse than just the sum of each deprivation.

5.5 Economic Characteristics of High-Poverty Groups

  • High-Poverty Groups: Specific demographics that experience higher levels of poverty, requiring targeted policies.

5.5.1 Children and Poverty

  • Child Poverty: Higher incidence among children, with half of those in MPI poverty being children. More than one-third of all children globally live in multidimensional poverty.

5.5.2 Women and Poverty

  • Female Poverty: Women comprise a significant portion of the poor, facing greater deprivation compared to men. Contributing factors:

    • Lower earning capacity.

    • Limited access to education and health services.

    • Prevalence of female-headed households.

5.5.3 Ethnic Minorities and Indigenous Populations

  • Indigenous Peoples: Often face severe poverty due to marginalization and conflict over resources. Estimated at 370 million in over 5,000 groups worldwide.

Rural Poverty

  • Rural Poverty: Over two-thirds of the poor live in rural areas, primarily in agriculture. This is a key focus in later chapters.

Poor Countries

  • Relationship between Poverty and Income: Poor individuals typically come from poor countries. Improving per capita income can lead to a reduction in poverty levels.

5.6 Growth and Poverty

  • Poverty Reduction vs. Economic Growth: The relationship between reducing poverty and accelerating economic growth has been debated. Traditionally, some believed that rapid growth could marginalize the poor, while others feared that spending on poverty reduction would slow growth.

  • Concerns:

    1. Public expenditure for poverty reduction might reduce growth.

    2. Income redistribution (e.g., through progressive taxation) could decrease savings rates.

  • Arguments Against These Concerns:

    1. Access to Credit: Widespread poverty limits access to credit and financial opportunities, hindering entrepreneurship and growth.

    2. Investment Behavior: The rich in poorer countries may not invest their income locally, unlike the poor, who often reinvest additional income in education and health.

    3. Economic Productivity: Low living standards among the poor lead to reduced productivity, which slows overall economic growth. Improving poor living conditions can enhance economic productivity.

    4. Demand for Local Goods: Increasing the income of the poor raises demand for local products, stimulating local production and employment, unlike the rich, who often spend on imports.

    5. Public Participation: Reducing poverty can encourage public involvement in development, while large income disparities can lead to disillusionment and hinder progress.

5.7 Labour, the Functional Distribution of Income, and Inclusive Development

5.7.1 The Functional Distribution

  • Functional Distribution of Income: This measures the income received by different factors of production (land, labor, capital) as a whole, rather than focusing on individual incomes.

  • Income Contribution: The functional approach analyzes how much each production factor contributes to overall income. For example, labor income is determined by market wages, which are influenced by supply and demand.

5.7.2 Labour and Inclusive Development

  • Labour Income: Most people's income comes from labor, with about 3.3 billion people currently working. However, many in developing countries earn through informal employment rather than traditional jobs.

  • Self-Employment: A significant portion of the workforce in low- and middle-income countries is self-employed, often in agriculture or small enterprises.

  • Poverty and Employment: Many individuals living in or at risk of poverty already work long hours but often in low-productivity and informal jobs, leading to irregular incomes and exploitation.

5.8 Policy Options on Income Inequality and Poverty

5.8.1 Areas of Intervention

  • Objective: Developing countries must determine effective policies to reduce poverty and income inequality while maintaining or accelerating economic growth.

  • Key Considerations: Understanding the determinants of income distribution is essential for implementing government interventions that can influence these factors.

  • Focus: The relationship between income inequality and poverty will be explored, particularly through non-income aspects such as health, nutrition, and education.

Four Broad Areas of Government Policy Intervention

  1. Altering Functional Distribution:

    • Definition: This refers to changing the returns to labor, land, and capital, which are influenced by factor prices, utilization levels, and the resulting shares of national income.

    • Goal: Ensure a fair distribution of income among different factors of production.

  2. Mitigating Size Distribution:

    • Definition: This involves translating functional income distribution into a size distribution, taking into account the concentration of ownership and control over productive assets and skills.

    • Goal: Address how these distributions ultimately determine personal income levels among the population.

  3. Moderating Size Distribution at Upper Levels:

    • Definition: Implementing progressive taxation on personal income and wealth to reduce disposable income among the very rich.

    • Goal: Increase government revenues for investment in human capital and infrastructure, promoting inclusive growth.

    • Disposable Income: The amount available for spending or saving after taxes.

  4. Moderating Size Distribution at Lower Levels:

    • Definition: Utilizing public expenditure from tax revenues to raise incomes of the poor directly (e.g., cash transfers) or indirectly (e.g., through public employment or essential services).

    • Goal: Sustainably increase the real income levels of the poor, building their capabilities and assets.